29 January 2009

Speech to Pritchitt Partners Annual Function, Sydney


'The Year Ahead'

Thanks very much to Pritchitt Partners for inviting me here today to talk about the year ahead.

As Prime Minister Kevin Rudd said in his New Year Message, 2009 will be a very tough year for the global economy and a tough year for Australia too, as fallout from the global financial crisis continues.

However, with threats come opportunities and the Government will use them to continue to strengthen our financial system for the future.

Most of us are aware that the world is facing the most significant upheaval in global financial markets since the Great Depression. What was initially seen as an isolated deterioration in the sub-prime segment of the US mortgage market has led to severe disruptions in global credit markets. This has affected the cost and availability of finance for a wide range of borrowers.

The problems intensified in mid-September 2008 after the collapse of Lehman Brothers, the fourth largest US investment bank. The collapse triggered a further crisis of confidence in financial markets. The cost of capital increased significantly, equity markets fell and credit markets effectively froze.

As a result there has been a sharp deterioration in the outlook for the world economy.

Many countries in the developed world are in recession, or close to it, including the United States, United Kingdom, Japan and Germany. Even resources boom giant China forecasts much slower economic growth this year.

Here in Australia, the Government has already put in place a $10.4 billion Economic Security Strategy and announced a $2 billion commercial property finance facility. Both are focused on jobs and growth.

In this, the second year of the Government's term, there is still much to be done in my areas of superannuation and corporate law.

Short selling regulations

In September 2008, the Australian Securities and Investments Commission implemented a total ban on covered short selling in line with the actions of securities regulators around the world.

As part of a staged approach, ASIC lifted its ban on the short selling of non-financial stocks from 19 November, 2008.

However, given the systemic importance of financial institutions to the Australian economy, ASIC decided to extend its temporary ban on financial stocks until 6 March. The Government supports this action.

It is a high priority for me this year to finalise regulations for the recently passed Corporations Amendment (Short Selling) Act 2008. Once the regulations are in place, the interim ASIC disclosure regime introduced last year can be withdrawn.

The Act confirms the powers of ASIC to regulate short selling; bans naked short selling (which means the seller will need a legally binding securities lending agreement before making a short sale) and will ensure disclosure of covered short sales.

Details such as the timing and manner of any disclosure to regulators and the market will be outlined in these regulations.

National regulation of financial services and consumer credit

A major focus for me this year will be to see through the transfer of consumer credit and other remaining state government regulated financial services to the Commonwealth.

This was a process agreed to by the Council of Australian Governments' (COAG) last year.

This will result in single, national regulation of financial services, and provide better protection for investors and consumers.

Regulation will be consistent across the country, curbing costs for product providers, while creating a regime more responsive to rapidly changing financial products and services.

Included in this transfer are mortgage brokers, trustee companies mortgages and payday lending.

For the first time, margin lending will also be properly regulated in Australia at a national level. Specifically, it will be fully regulated under the Corporations Act as a financial product, meaning a substantial increase in oversight, disclosure and consumer protection.

The Government's Financial Services Working Group has been tasked with ensuring that disclosure documents for margin loans under the new regime are simple and easy to read, unlike the often Latin-like documents we've seen in the past. Consultation on new disclosure documents have recently begun and will be similar to the process for First Home Saver Accounts.

Other key elements of the action plan to nationally regulate financial services are set to be enshrined in legislation by mid June 2009.

Specifically, the existing state legislation, the Uniform Consumer Credit Code (UCCC), will be enacted into Commonwealth legislation.

The Australian Securities and Investments Commission (ASIC) will be the sole regulator of the new national credit framework with enhanced enforcement powers.

All providers of consumer credit and credit-related brokering services and advice will have to obtain a licence from ASIC.

All licensees will have to comply with conduct requirements including responsible lending practices.

Credit rating agencies

Details of the future regulation of credit ratings agencies and product research houses will also be finalised and implemented during 2009. This is a high priority in the wake of the global financial crisis. The Government has already announced that firms will have to have an Australian Financial Services Licence (AFSL) and report to ASIC annually on the quality and integrity of their ratings processes, including conflicts of interest management.

I will be convening several roundtables during February on CRAs.

Superannuation and intra product advice

Moving onto the superannuation part of my portfolio, the Financial Services Working Group, with which I am heavily involved and which is charged with simplifying complex product disclosure documents, is continuing work on the provision of intra-product advice within superannuation.

The aim is to allow super funds to provide simple advice at the lowest possible cost to their members, on issues such as super contributions, investment options and insurance.

As I have previously said, I believe this area is one of the largest areas of unmet need in financial planning.

Lost superannuation

Work will also proceed on the Government's plan to re-unite Australians with their lost superannuation through the use of Tax File Numbers (TFNs).

Treasury is currently assessing submissions to the recent consultation paper on the Government's superannuation clearing house measure. This was a promise taken to the last election. Its main aim is to help small business handle employer super contributions to multiple super funds.

Importantly, the clearing house consultation paper also took submissions on how to solve the $12.9 billion lost super problem and some innovative ideas were received.

APRA data on fund performance

This year, the Australian Prudential Regulation Authority will publish data showing the long-term performance of superannuation funds.

APRA data will also assist the Australian Industrial Relations Commission and industry bodies to assess the ongoing appropriateness of default super funds in modern industrial awards.

The reality is while Australians are entitled to choose their superannuation fund, most workers end up in default super funds because they fail to actively "choose" a fund.

However, because it is a compulsory system, I believe all Australians are entitled to expect a high quality default super fund.

In these difficult economic times, many fund members will also question the fees they pay. The annual fee for super funds across the system is 1.25 per cent, according to Treasury.

Lower fees translate to higher long-term returns. Lower fees are also in the best interests of the member which is the underlying principle in a compulsory system.

I believe this fee should be 1 per cent or less and have asked industry for their ideas on how this can best be achieved.

CGT rollover for merging super funds

On the costs front, the Government announced that from December 24, 2008 to July 1, 2010, it would provide an optional CGT rollover for capital losses arising from CGT events which happen when super funds merge.

This initiative will preserve the value of capital losses in the receiving super fund, allowing them to be offset against future capital gains, for the benefit of members.

Any capital gains that may be realised under a merger will continue to be taxable. However, as capital gains and losses are calculated on an asset-by-asset basis, providing an optional rollover will allow the transferring fund to choose not to disregard capital losses realised under the merger to offset against realised capital gains.

This was previously a barrier to super fund mergers and the Government is keen to remove barriers that increase cost efficiencies for funds and reduce costs to members. The Government will provide this CGT rollover as a short-term measure pending the outcome of Australia's Future Tax System Review.

Economic benefits

While superannuation returns are being tested by the global financial crisis, it is worth focusing on the economic benefits that our $1.1 trillion superannuation savings pool brings.

Many superannuation funds are large investors in nation building assets such as infrastructure.

And, in ordinary times, roughly 40 per cent of an average super fund is typically invested in Australian shares which means super contributions and savings provide a valuable source of capital for Australian companies. This translates to jobs for Australians.

The compulsory nature of super contributions also benefits superannuation investors.

Among other things, it means that super funds can buy assets at all stages of a market cycle because that flow of super contributions will always be looking for a home. At this stage, some assets are cheaper to buy than they would have been 18 months to 2 years ago. This will benefit Australian super fund members once the market recovers and the values of those assets rise again.


Ladies and Gentleman, as you can see, 2009 is shaping up a challenging year but I can assure you that the Government will continue to tackle the effects of the global crisis swiftly and decisively.

Thank you.